Under most circumstances, particularly in the art world, sophistication is an asset, a quality that helps one glide through art openings and delight at dinner parties. A handful of recent court decisions, though, have turned it into a potential liability, as judges question whether sophisticated art collectors can viably claim they were misled when high-end art transactions go awry.
The rulings highlight the growing scrutiny courts are paying to how art buyers conduct themselves during a transaction, and suggest that due diligence is more important than ever—especially at the top end of the market.
“In the art market, where we have such sophisticated and wealthy participants, courts are not sympathetic to a buyer who gets defrauded who doesn’t do his or her homework until after” the transaction, said Judd Grossman, founder and managing partner of Grossman LLP in New York, speaking on a panel at EXPO Chicago this fall.
“The notion of reasonable reliance, that’s always been around,” Grossman said in a recent interview. “You’re just seeing more litigation on the sale of art, and a lot of that has to do with the price points.”
Grossman was describing the legal concept that says if a prudent person takes steps (such as buying a painting) by reasonably relying on the claims of another person (say, an art dealer), only to find out their claims were inaccurate, she can recover damages. Whether the reliance was “reasonable” is, in turn, a function of “the relative sophistication of the parties, and the information available to the prudent person,” Grossman said, in the course of doing ordinary due diligence prior to a transaction. The expansion of the top end of the art market, and a concomitant increase in litigation, has led to more attention to what constitutes adequate pre-sale due diligence.
“While there is no precise formula to determine reasonable reliance, what is clear is that buyers cannot blindly rely on the representations of sellers, no matter their stature in the marketplace,” Grossman added.
For a long time, said Thomas C. Danziger, managing partner at New York’s Danziger, Danziger & Muro, LLP, courts as a general rule have imposed higher standards of due diligence on art market professionals, while holding collectors to a lower standard than someone in the trade. But a “sophisticated” collector—for example, one who frequently trades in the upper echelons of the market and has demonstrated knowledge of how to undertake due diligence in an art transaction—might be held to the same standard as an art market professional, he surmised.
For example, in her 2014 opinion dismissing a case in which billionaire leveraged buyout specialist Ron Perelman sued Larry Gagosian of Gagosian Gallery
for fraud, breach of fiduciary duty, and other related charges, New York Supreme Court Justice Barbara Kapnick noted Perelman’s deep knowledge of the art market and hundreds of transactions going back decades as factors that undercut his claim to being reliant on Gagosian to determine the values of certain works. Perelman had alleged that Gagosian had undervalued works he was buying from Perelman, and had overcharged Perelman for works he was selling, in a complex transaction that involved the trading of multiple works between the two parties.
“[The] plaintiffs’ allegations make clear that they were experienced and sophisticated business investors who entered into negotiated, arm’s-length transactions with defendants, which does not give rise to a fiduciary relationship,” the judge wrote. Elsewhere, she noted Perelman’s “20 years of experience making art investment decisions” and the “nearly 200 works” Perelman had bought and sold through Gagosian alone.
The court “held that Ron is a sophisticated guy; he couldn’t claim to rely blindly on what Gagosian was telling about [the value of] those works,” said Grossman. “You can’t base a fraud claim on an opinion.”
The scrutiny also comes at a time when art market participants wear multiple hats. A dealer may also advise, an advisor may also collect, and a collector may also wheel and deal—making it harder to establish a clear fiduciary duty between parties. In the same opinion, Justice Kapnick cited Gagosian’s “various roles as consignee, seller, buyer, broker, bidder, and agent.”
Enforcing due diligence standards would have been easier “when roles were very clearly defined,” said New York–based lawyer Christopher Robinson of Cahill, Cossu, Noh & Robinson, LLP, who spoke on the September panel at EXPO Chicago. “A dealer was a dealer, an advisor was an advisor, a purchaser was a purchaser. But collectors now are buying and flipping stuff all the time. The roles are confused and that kind of distinction becomes much more of a factor on a case by case basis.”
For example, a buyer like Perelman may intend to resell a
work shortly after taking possession of it, making him more like a dealer. Such was the case in the ongoing dispute between the Swiss advisor and dealer Yves Bouvier and his client Dmitry Rybolovlev. Rybolovlev had believed that Bouvier was his advisor who earned a 2-percent commission on transactions, but alleges that Bouvier acted more like a dealer, sourcing works and marking them up significantly before he sold them to Rybolovlev.
Several participants on the panel noted that judges’ increasing attention to buyers’ due diligence responsibility may stem from their own lack of familiarity with the art market, and its ins and outs.
“The courts expect…somebody with a certain level of sophistication to understand what they’re getting into, and they’re not sympathetic,” said panelist Sharon Flescher, executive director at the International Foundation for Art Research. “It comes from the uncomfortableness of the judge to be really determining the case in an area where they’re relying on experts.”
Even in cases in which a buyer prevails, her or his level of sophistication is still subject to scrutiny. In August, a judge allowed a fraud case against a mother-son pair of dealers brought by oil trader and hedge-fund manager Andrew Hall to proceed, even though he, too, is a sophisticated, long-time art collector. Hall had purchased 24 works he thought were by painter
from Lorettann and Nikolas Gascard, which he now alleges are fake. Hall’s doubts arose in 2015 when he began researching their provenance ahead of a Golub show he planned to stage at his private museum in Vermont.
The Gascards told the court that Hall, as a sophisticated buyer, should not have relied solely on their claims of authenticity, and sought opinions from outside experts. Hall noted in court filings that even Sotheby’s and Christie’s, where he had purchased some of the Golubs consigned by the Gascards, had been fooled by the fakes. In November, after a New Hampshire court ordered the Gascards to repay Hall $465,000
, he told the New York Times
he will “probably have a big bonfire” with the fake paintings.
“You can’t always excuse your nefarious statements and misconduct by saying, ‘Oh, the plaintiff should have done more,’ but the fact that those statements are being considered is a sign of how expectations” have shifted, said Grossman.
Yet in a similar case
in which Grossman represented Canadian gallery Equinox, which had purchased stolen works by
from New York art dealer Fred Dorfman, the courts gave the buyer the benefit of the doubt. In January 2018, a Manhattan district court allowed the gallery to proceed with its claim against Dorfman, who was selling works provided to him by Johns’s former studio assistant; the assistant, he said, had claimed they were gifts. The case settled shortly after.
In this case, Grossman pointed out, calling Jasper Johns to confirm the works’ provenance could have ruffled feathers in the world of closed-doors private dealing, where buyers and sellers may not want to out themselves as a party to a transaction.
“The art world…is so quiet and there’s so little transparency,” Grossman said. “The more diligence you do, you can blow up the deal.”
Fortunately for his client, he added, sometimes “a fraud is a fraud is a fraud.”